The use of cryptocurrencies has been on the rise since 2009, the year in which the Bitcoin was first introduced.
Currently, cryptocurrencies are generally regarded as the new age of financial services technology. Such use of the currency has much to offer, including efficient and precise payments. Moreover, the so-called “unbanked” have greater access and impartiality from the centralised monetary policy. There are some obvious advantages, however many legal and taxation issues may arise.
We cannot help but wonder: what happens to these virtual currencies once the owner has passed away? Is an individual able to distribute such assets if he wishes to do so through his will?
Cryptocurrencies in Hong Kong
The rise of the term “Bitcoin” has been prevalent since it was first introduced as a white paper in October 2008 by some anonymous person with the name of Satoshi Nakamoto. Essentially, a Bitcoin blockchain includes a sequence of blocks which transcribes and archives transactions between addresses. The amount of Bitcoin stored can be seen at each address but who is holding it remains anonymous. The moving of the virtual currency between addresses can be done through the authorisation of a private key, often printed on a piece of paper or stored electronically in USB thumb drives or a hardware wallet.
A crucial element that is specific to the Bitcoin is that its value will not be diminished through the production of more coins. Since there will only ever be 21 million bitcoins in existence, it is unlike traditional currency which may be affected by government monetary policies.
In Hong Kong, the use of Cryptocurrency is not as prevalent as in countries such as Japan and the United States. The monetary authority named cryptocurrency as “virtual commodities” and the governing ordinances mostly comprise of the Sale of Goods Ordinance (Cap.26) and the Trade Descriptions Ordinance (Cap.362). Cryptocurrency is still mostly dealt over the counter or through peer to peer platforms.
In some jurisdictions, various tax issues arise. For example, in America under the Internal Revenue Code, Cryptocurrency is considered “property” under the Internal Revenue Code. As a result, any transaction that involves cryptocurrency may be subject to possible income tax, capital gains and employment tax. A similar position is adopted in the United Kingdom where businesses accepting cryptocurrency are subject to corporate and income tax. Another tax category where cryptocurrency may fall under would be value-added-tax. This is the case in Australia and in Singapore where cryptocurrency is classified as barter trade and any disposal will be subject to value-added-tax.
Estate tax is also another potential tax category that cryptocurrency may be subject to. This should be considered during the estate planning process. However, such situations do not generally apply in Hong Kong as these taxes are not applicable and exempted.
Cryptocurrency and Estate Planning
Considering the increased prevalence of cryptocurrency, such assets should be included in a person’s will as part of his or her estate planning. One of the key issues is to ensure that cryptocurrency is persevered beyond the death of its owner. Once the private key, i.e. access to the Bitcoin, is lost – the Bitcoin becomes irrecoverable. There have been instances where millions worth of assets have been lost by Bitcoin owners because they have misplaced a hard drive or USB.
When planning your estate, clear instructions should be given to your personal representatives regarding the methods to access the computer, storage devices and accounts and data. Such instructions should however be securely kept in a safe place. It might be useful to have this document including all the private information separate from the existing legal documents. Consultation can be made with your lawyer in which they can provide you with an information sheet to fill out the relevant personal data.
It is crucial for your personal representatives to have access to your smartphone, especially when you store your cryptocurrencies in it.
The storage of this document is also important due to the confidential and sensitive nature. For example, it can be kept in a safe environment such as a bank safe deposit box. Alternatively, a hardware wallet with added protection or apps which organize your cryptocurrency access can be utilized as well. No matter the method, all of this must be readily accessible by the executor and administrator where clear and easy instructions are given to ensure successful access. The information must also be kept up to date in case of any changes.
Virtual assets might also be included in the setting-up of trusts and passed on to the beneficiaries under the trust. Similarly, clear instructions should be given to the trustee regarding how to distribute and access these commodities. Separate instructions will also be useful, and it is advised that this is to be updated regularly as well.
Cryptocurrencies and Trust & Estate Administration
At present we are not aware of any professional trustee who is willing to receive cryptocurrency from their clients to settle into their family trusts, and do not believe that professional trustees should accept cryptocurrency as trust assets.
When an executor or administrator of an estate receives cryptocurrencies from the deceased, he or she should liquidate them as soon they are allowed to do so, otherwise they may be held in breach of their duties of care under s3A of the Trustee Ordinance (Cap. 29). Cryptocurrency does not fall into one of the authorized investments in Schedule 2 of Trustee Ordinance. Even if a trustee has special knowledge in dealing with cryptocurrencies, or he entrusts a professional to manage such assets for him, the volatility of cryptocurrency would render him in breach of his duties to invest the trust assets as an “ordinary prudent businessman”. Moreover, a trustee’s duties to account may become very difficult to fulfill with cryptocurrency as no statement is provided, making it almost impossible to monitor the value at any point in time.
Cryptocurrency is a valuable asset, hence it is subject to s60J of the Probate and Administration Ordinance (Cap. 10) and should be listed in the Schedule of Assets and Liabilities (Form N4.1) when applying for a grant of probate/letters of administration. Otherwise the executor/administrator would be in breach of that section for intermeddling with the estate. Whilst it is not necessary to set out the value of cryptocurrency in the said form when the grant is being applied for, the estate administrator should nevertheless check the price of the deceased’s cryptocurrency as at the date of death of the Deceased. It can be used as the reference value when the grant is issued and then the cryptocurrency can be liquidated.
In summary, cryptocurrencies can prove to be quite tricky when dealing with tax, estate and trust matters. Assistance from lawyers or other professionals is necessary in the planning process.
Our team at Hugill & Ip has extensive experience in navigating Hong Kong’s complicated testamentary, probate and inheritance laws – so kindly get in touch with us to find out how we can help.
This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.
The article was originally written for STEP Hong Kong January 2019 Newsletter